Tax refunds can be dangerous territory. What you need to know before you chase after them.

Mar 16, 2018

Come tax time, Canadians and their media are obsessed with tax refunds. Getting money back when you file your tax return seems to be the greatest good, and the standard by which tax preparers are measured. Mobile signs on street corners advertise BIGGER refunds. Advisors on their internet blogs offer sage advice for putting your refund to the most advantageous use. One such advisor even suggested giving the proceeds of a tax refund to adult children to help with the downpayment for a house. (Just how BIG a refund does he believe is to be expected?) It makes one question the legitimacy of the expectations created by the accounting industry. Apparently, the bigger the refund, the better the accountant.

In counterpoint to this commercialized and frantic pursuiot of a bigger tax refund, DioGuardi submits, based upon many decades of tax practice and an intimate understanding of the Canada Revenue Agency, that the true golden mean of tax is to pay what you ought to pay, and not a penny more or a penny less, according to the tax rules enacted into law by the people you elect as your federal and provincial representatives.

Yet every year people are lured, or fall into, the trap of pursuing a bigger refunds through an over-zealous use of tax credits.

There are tax credits for almost everything. Saving for your retirement? Make sure you get the tax credit for the money you put into your RRSP. Deduct your medical expenses. Claim all your cash gifts to churches and charities. Drive your personal car on company business? You should get a tax credit for that. It’s only fair that the government gives you credit for all these expenditures of your after-tax dollars.

But no gift from the government comes without strings. In return for the tax benefit, you must surrender information, often a great deal of information, and therefore your privacy, to demonstrate your worthiness of the benefit. In demonstrating your worthiness you may also be required to give up the information (privacy) of others. For any tax credit, you may be asked to provide receipts and proof of payment in the form of cancelled cheques, or bank and credit card statements. Claiming what you paid the babysitter? You’ll need to provide her/his name, SIN number and phone number. And you better hope she/he reported the income on her/his tax return. As for driving your car on company time, you’ll need every last gas receipt – not a credit card statement. The actual receipt! – plus a daily log showing the to and from address, the purpose of the journey, and the exact mileage. You will also need your employer to provide a form declaring that driving your car is a condition of your employment. It’s a lot of work for what may be only a $1000 or less per year.

Recently, and for reasons unknown, DioGuardi has seen a rash of taxpayers who kept pumping money into their RRSPs ( or TFSA accounts) every year, to the point where they exceeded their contribution room. The CRA punishes these overcontributions with a penalty of 1% per month on the excess amount, with interest charged. That can quickly add up to far more than the tax refunds received for all the contributions, and also take a huge bite out of your savings.

Saddest of all are the people whose tax preparers either inflated the value of donations made to fraudulent charities or tax shelters, or claimed fictitious business income and capital losses on their behalf. These tax preparers, who often claimed to be accountants but mostly lacked credentials, engineered very large tax refunds for their clients, often overe several successive years. Unfortunately, years later the CRA reviewed the refunds, determined they were bogus, and issued reassessments that clawed back the money with interest and, in some cases, penalties. Thousands of people now collectively owe hundreds of millions of dollars to the Taxman. Some will never be able to pay and will be forced into insolvency.

What the CRA gives, the CRA can also take away. The computers at the Canada Revenue Agency spit out refund cheques freely at tax time. But months later human eyes often review the refund, especially the large refunds, and an audit may ensue. Depending on the outcome, you may be required to pay back all or part of the refund, with interest.

Think twice and take promises of a bigger refund with a grain of salt. If it looks too good to be true, it probably is.